(This essay was published in South China Morning Post on 22 March 2017.)


Home prices soared in late 2016 to the surprise of many, after falling by about 4 per cent between 2015 and 2016. Developers quickly pushed large numbers of pre-sale units onto the market at very high markups. The government responded quickly by slapping on an additional punitive stamp duty in a bid to cool down what was perceived as renewed speculative fervor.


This was a mistake. There are no speculators or short- or medium-term investors in the property market anymore, only final users and long-term investors with excess liquidity. Buyers today are more concerned about affordability than appreciation potential over the short or medium term.


The recent rise in property prices has been spurred by two factors. One is the public’s perception of the economic future and the implication for their home purchase decisions. The other relates to why developers rushed to push units onto the market with high markups:  the pre-sale market is being crushed under a ton of regulations.


In terms of the economic future, we are emerging from a decade marked by false dawns, in which optimism about economic recovery at the start of each year was undone – whether by the euro crisis, wobbles in emerging markets, the collapse of the oil price or fears of a meltdown in China. The US economy kept growing through all this, but always into a headwind.


However, by the end of 2016, the signs were gathering that the vigor of American economic growth was being accompanied by growth everywhere else, from China, Japan and South Korea to Europe, Russia and Brazil.


In Hong Kong, good news on the three key macroeconomic indicators – unemployment, China’s economic performance, and the future path of interest rates – has given aspiring homeowners sufficient comfort to enter the property market.


But there are still many households who cannot afford this option. The large cumulative unmet housing demand is phenomenal. This explains the estimated 200,000-plus sub-divided units in the private sector, and to some extent why housing prices and rents have skyrocketed.


When prices soar due to shortages in the market, the public naturally blames the government. Governments everywhere usually respond by blaming speculators. Their favorite policy is to penalize transactions through levies to suppress prices. This works in the short run because buying and selling activities slow down and price increases are delayed. But shortages remain and inevitably prices will rise again.


Many decades ago, Mr. Henry Fok created a forward market for pre-selling units before their completion to spread risk and provide liquidity. The pre-sold units were tradable. At first, stamp duty was exempted on transactions in the forward market, which led to active trading activity there.


Developers were able to use the price information revealed in the forward market to price the sale of new units that were released in batches over time, and thus better diversify risk.


However, in a bid to prevent speculation, the stamp duties was later extended to transactions in the forward market. High punitive stamp duties introduced in late 2012 and 2013 (including the special stamp duty and double stamp duty) killed the incentive for speculators to trade units in the forward market. Furthermore, the government has also required developers to use lotteries to assign pre-sold units to prospective buyers, making it difficult to place the units with known speculators.


Because the elimination of the pre-sale forward market weakens the price discovery process, developers today are flooding the market with a lot of units at high mark-ups as soon as they detect some positive sign of buyer uptake. Mispricing has become more likely as markets have become highly regulated, contributing to greater price volatility.


There is also an impact on the secondary market. Large developers offer discounts and financing arrangements to cash-strapped buyers in the primary market, thereby inflating the nominal prices of units that they sell. Vendors in the secondary market typically are unable to match such offers so transactions there have dwindled.


The net result for buyers has been to shift demand away from the secondary market to the primary market. Between 2011 and 2016, annual secondary market transactions have decreased from 73,582 to 37,908 units. Meanwhile primary market transactions have increased from 10,880 to 16,793 units. Buyers now have less choice of units because of punitive stamp duties.


When the punitive stamp duties were imposed, many argued they would prevent a hard landing by dampening speculation. We now know speculation has been eliminated, but prices have not abated


The world economy is recovering, even if one may argue whether it will be a robust recovery. But it is certain that buyers have less choice due to the decline of secondary market transactions. I am puzzled why the slaying of the forward market in pre-sale housing units – this great creation of Mr. Fok – has been celebrated as a huge policy success.




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